The best approach to plan individual investment is, to begin with, upcoming financial goals which are recognized and predictable. Most people have these financial goals in plenty, it includes home plans and children’s education to retirement. After setting up a list of goals you can set or plan investments that are a match for each depending upon the various factors like the amount needed, time frame, and other factors. For many of the people, this full-blown complex goal-based system may become too much work. For planning such financial goals, a simpler system should be maintained which is called a simple four bucket system. This pandemic has brought home the urgency and the importance of planning an individual’s finances and savings properly, especially the emergency fund part of it.
Four Bucket System
The four-bucket system is the best and simpler framework and a much capable one. Everyone should start from the long-end and deal with long-term needs first. The first bucket is all about immediate needs and emergency funds. Most of the people do ignore the emergency funds. Everyone should keep and save for emergency funds and immediate needs. The pandemic has changed view about such things, thus adjust according to what you feel is better. The second bucket is all about the medium-term requirements which are about 5 years. We should predict these types of expenses with some certainty. If you would like to buy a house in 5 years you will need to set down an initial payment. In the case of a car also, you know that your car will be old after three to four years and you’d like to buy a new one. These needs are distinguished from the longer-term ones just by a shorter period. The reason is that the shorter time frame is they are more precisely predictable in time and amount.
The third bucket is the one where you put requirements that are 7, 10, 15, or even more years away. The vital factor is the time frame of these needs. It is very difficult to predict the exact amount you will need. Another challenge faced is to predict the child’s education cost after 12 or 13 years. It all depends on what kind of education she/he wants. The fourth bucket is something different that consists of the statutory tax-saving investments. It is a separate entity because it saves you taxes. Instead of our choice, the term of investment is enforced by the tax laws.